Pensions and Compensation article
by Dr. Ros Altmann
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The UK pension system is caught up in one of the greatest social injustices of our time. Over 65,000 people have lost most, or all, of their promised occupational pension when their employer schemes wound up. For those in their 50’s and 60’s, relying on an employer pension to fund them through retirement, after saving all their working life for a comfortable old age, it is too late to do anything else.
In April 2004, the Government finally listened to demands for compensation for these people and announced that it would establish an Assistance Scheme, to pay out £20million a year over 20 years to help some of the people who have lost out when their scheme wound up. This was a major breakthrough and is most welcome but, sadly, the amount of money is totally inadequate to sort out the problem.
Although the Government has recognised that the taxpayer must help these people, it has not gone far enough. This situation is causing major damage to confidence in pensions and I believe restoring these people’s pensions is a necessary condition to restoring pensions confidence.. After the 1995 Pensions Act, members truly believed they were protected by the law. Members were never warned that the receipt of their pension depended on their employer staying in business and deciding not to wind up the scheme. Less than ten years later, people are being told once again that the current Pensions Bill will ensure protection for pensions and restore confidence. However, unless the Government agrees to reinstate the pensions of those who trusted the last measures, which did not work, it is difficult to believe confidence can be restored.
I have now organised for the members’ MP’s to approach the Parliamentary Ombudsman and ask her to investigate this case. There is clear evidence of maladministration by successive Governments, which promoted and encouraged individuals to join their employer’s scheme without warning of the risks. Once in the employer scheme, Inland Revenue rules prohibited any other pension, so members could not diversify their pension assets. This system, with hindsight, was like forcing members to invest their entire retirement savings in the shares of one company. No-one would advise putting all one’s investment capital into the shares of one company. But these members never thought about needing any other savings. Why would they when the employer contributed to the scheme and promised a ‘guaranteed’ pension everyone told them it was safeand the media was full of stories about people receiving compensation after transferring out of final salary schemes because it was best to stay in?
The Government is directly implicated in the failure to provide proper risk warnings. In 2000, the Institute of Actuaries told the Treasury that members erroneously believed their contributions were fully protected and advised, at the very least, disclosure to members of the risk to their pensions on insolvency. After consultation, the Treasury ignored the actuaries’ advice and decided not to warn members. Worse still, official Treasury publications continued to tell members that their employer pensions were guaranteed. For example, the ‘FSA guide to the risks of opting out of your employer’s pension scheme’, sent out in 2002, states ‘Some types of employers’ schemes (the ones called ‘final salary’ or ‘defined benefit’ schemes) give you a guaranteed pension. The amount of pension you get from a personal pension is unpredictable’. No mention of the risks of scheme wind-up.
There is also a powerful public interest argument for taxpayers to pay compensation. These people did everything society asked of them, contributing for decades to ensure they could look after themselves in retirement. Yet their contributions are being used to buy pensions for other members instead. Indeed their sense of injustice is compounded by the obvious unfairness of the current priority order rules. For example, Directors of some schemes took early retirement before the company failed, getting their full pension protected, whereas workers in their 60’s, who contributed for decades, get almost nothing. In order to restore confidence in our pension system, these dreadful injustices must be put right.
The circumstances of this case are unique. Government assured these members that their money was protected by law, and that their contributions would deliver a guaranteed amount of pension. Government has acted without due care. Financial advisers or companies that persuaded people to invest money with false assurances, would be forced to fully compensate investors for any losses. The same rules should surely apply here, and I hope that the Parliamentary Ombudsman will ensure that this is done.
Precise data about the cost of compensation are not available, but my estimates suggest it will cost around £75 million a year, for 30 years. Compared with the £14billion spent every year on tax relief for pensions, this is a tiny sum. It is easily affordable within the current DWP budget (there is over £100 million in the next three years’ budgets ‘unallocated’, which could be earmarked for compensation). However, £20million a year for 20 years, is nowhere near enough to help everyone concerned. The Government has also said it will only help the ‘worst cases’ and will not assist members of schemes from solvent employers. I do hope that it will be forced to rethink this approach, will include all those affected and commit to putting in more money. It is also vital that OPRA tells trustees of schemes in wind up not to purchase annuities, because once annuities are bought, the scheme assets are gone and compensation becomes both more expensive and more difficult.
The members affected should not have to suffer any longer. Their stories are dreadful. Here are some examples. A Dexion scheme member, aged 62, who contributed for 38 years, will not even get his full GMP. He could have retired at 60 but was asked to stay on and promised a higher pension. He would have been better off never putting a penny into his company scheme and just relying on SERPS. He says ‘I’ve worked since age 15, never been on the dole, only claimed one week sick pay. I did everything I was asked. I saved for our future. For what?’ Or the BUSM member, aged 61, with 40 year’s contribution who now has to sell his house because he has lost the pension he was relying on. He says ‘It is impossible to imagine the stress I‘m under. Many other colleagues also contributed for over 40 years and have lost it all’. The ASW member, aged 60, who is now stacking shelves at Sainsbury’s on £4.39 an hour and says ‘The stress in unbearable. I’m on the verge of a nervous breakdown.’ Or the 52 year old member-nominated trustee of the Sara Lee scheme who says ‘I was never told of the risk of insolvency, we were always told the accrued pensions could not be reduced’. She transferred 20 years of contributions from the previous money purchase scheme into the new final salary scheme, set up in 1996, and has now lost it all.
In summary, I believe compensation is essential to restoring confidence in pensions.. The cost of restoring these people’s pensions is tiny, compared with total pension spending. I hope that the Parliamentary Ombudsman will achieve the social justice which these people deserve and force Government to pay proper compensation to all those who have lost out so badly, while relying on Government and the pensions industry to protect their pension contributions. The longer this situation drags on, the worse the damage to pensions. This social injustice cannot be allowed to stand.